+ The advantage of trading pullbacks is that you buy low and sell high in an uptrend and vice versa in a downtrend.
+ The second advantage is that you are trading with the trend so the psychological pressure will be reduced compared to when trading against the trend
1. Combined with indicators
+ As with any trading method, there are many indicators you can choose to incorporate into your strategy, but remember: the simpler your chart, the better.
+ The author recommends using Fibonacci Retracement, and the examples in the article also use this indicator.
+ Fibonacci Retracement is used to identify potential support and resistance levels where the price may reverse.
When trading pullbacks, the Fibonacci levels that are expected to be met are 38.2%, 50%, and 61.8%. The depth of a pullback often depends on the strength of the trend, for example if the current trend is quite strong, the Fibonacci level that is expected to be met is 31.8%.
2. Pullback Trading Rules – Buying Opportunities
+ As mentioned, one of the advantages of this method is trend trading, so identifying a trend before trading is crucial for you to be able to make a profit.
- Identify an uptrend based on price action :
+ Identifying an uptrend is quite simple by looking at the highs and lows that are forming. Usually the appearance of higher highs and higher lows is a confirmation of an uptrend.
If you want to be more visual, you can use trend lines by connecting the bottoms in an uptrend, the tops in a downtrend.
Note: It is good to use a higher time frame to determine the trend relative to the frame you want to place the order.
- Wait for pullback :
+ After determining the trend, the next step is to wait for pullbacks to appear on the time frame you want to place an order, the author uses the 1h frame.
The next step is when we will use the Fibo tool.
- Identify Fibonacci Retracement Levels :
+ To find entry points, traders need to identify Fibo levels by using this tool and connecting the lowest low and highest high in the area together.
- Buy at the 50% -61.8% price zone :
+ After determining the Fibo levels, the 50% - 61.8% zone is the target price zone where you can enter an order. There is no specific rule, over time you will have the so-called "market felling", from which you will know whether to wait for the price to recover further or enter immediately to seize the opportunity.
The illustration above shows a pretty nice entry point, not only the 61.8% Fibo zone but also a resistance level that has been re-tested quite a few times before.
- Setting a Stop Loss :
+ The recommended stop loss setting point is below the lows used to determine the Fibonacci levels.
+ In case the price breaks this level, it is very likely that the price has reversed the trend. In some cases, this can be a relatively large stop loss, so we need to have an exit strategy to maximize profits.
- Done
+ For maximum effectiveness, the author recommends using a partial exit strategy. Specifically, the first exit point will be the swing high used to determine the initial Fibo level, the remaining part will be at the 100% Fibo extention level. (image above)
+ The rule for a sell opportunity is the opposite of a buy order, see the example below:
Above I have introduced to you a way to trade according to the trend using Fibo combined with price action, hope the article has brought useful information!
Happy trading,
